Not such a su­per mar­ket for the over­seas gi­ants

Bri­tish chain Tesco has been forced to take a new tack with its China op­er­a­tions

China Daily (Hong Kong) - - BUSINESS COMPANIES - By LYU CHANG lvchang@chi­nadaily.com.cn

Al­though Tesco Plc’s spa­cious stores are well-lit and spot­lessly clean with wares taste­fully dis­played, Helen Wang sel­dom shops there. Wang, 32, of Bei­jing, prefers to buy most of her gro­ceries at Wu­mart Stores Inc, a Bei­jing- based chain, where she can eas­ily find fresh del­i­ca­cies in­clud­ing raw chicken feet, which are al­ways heaped on a ta­ble, or cheap veg­eta­bles.

“It is close to home, the food is fresh and prices are won­der­fully low,” says Wang on her way home af­ter work and shop­ping. “For large daily necessities I al­ways shop on­line,” she says.

Shop­pers such as Wang are mak­ing life ex­tremely dif­fi­cult for big in­ter­na­tional retailers in­clud­ing Tesco. The rapid rise of e-com­merce firms in China has com­pounded their prob­lems in a mar­ket once seen as full of po­ten­tial.

Since the early 1990s, for­eign su­per­mar­ket chains from Car­refour SA to Wal-mart Stores Inc have waded into the coun­try, des­per­ate to win over its bur­geon­ing mid­dle class, but lack lo­cal ex­per­tise or are short of cap­i­tal.

Af­ter nine years of in­de­pen­dent op­er­a­tions in China, Tesco, Bri­tain’s largest re­tailer, an­nounced on Au­gust 9 that it was in ex­clu­sive talks with the State-owned China Re­sources En­ter­prise Ltd for a joint-ven­ture agree­ment merg­ing their Chi­nese op­er­a­tions.

The pro­posed deal, fol­low­ing Tesco’s de­ci­sion to quit the United States and Ja­pan, rep­re­sents a sig­nif­i­cant scal­ing down of the UK com­pany’s Chi­nese op­er­a­tions. Un­der the deal, Tesco’s 131 supermarkets, hypermarkets and shop­ping mall busi­nesses in China would be com­bined with the Hong Kong-listed CRE’s al­most 3,000 stores.

CRE, a ma­jor su­per­mar­ket op­er­a­tor in the coun­try that in­cludes the Van­guard chain, would con­trol about 80 per­cent of the ven­ture. Tesco, the world’s third-largest re­tailer, would have the rest.

It would bring to­gether “a deep un­der­stand­ing of lo­cal cus­tomers, an es­tab­lished na­tion­wide in­fra­struc­ture and proven track record with Tesco’s global re­tail ex­per­tise, in­ter­na­tional sourc­ing scale and sup­ply chain ca­pa­bil­i­ties”, CRE said.

Re­tail an­a­lysts said the de­ci­sion seemed to be good for both sides, but it was es­sen­tially a lost bat­tle for Tesco, which failed to make much head­way in the Chi­nese mar­ket.

Oceanne Zhang, head of Mar­ket In­sights China, a di­vi­sion of the con­sult­ing and re­search firm Kan­tar Re­tail, said the root of Tesco’s re­treat from China was a fail­ure to un­der­stand how to build strong re­la­tion­ships with sup­pli­ers and give first­class cus­tomers a unique shop­ping ex­pe­ri­ence.

“Chi­nese re­tail­ing is very dif­fer­ent to mar­kets else­where and it is very frag­mented,” Zhang says. “The Chi­nese want high-qual­ity, cheap prod­ucts but they also want con­ve­nience.”

The main dif­fer­ence be­tween the shop­ping habits of the Chi­nese and Western­ers is that the for­mer tend to buy their food daily rather than weekly, she says.

“But Tesco’s su­per­mar­ket stores and hypermarkets are some­times too spa­cious and have for years have con­cen­trated too much on per­fect­ing the mix­ture of items, which makes it dif­fi­cult to change di­rec­tion when needed.” For ex­am­ple, store dis­plays should be such that Chi­nese cus­tomers can eas­ily find what they want rather than hav­ing to wade through a myr­iad of goods. Snacks should mean chicken feet, not sausage rolls. And wet- mar­ket sec­tions should al­low cus­tomers to pick out fish from a tank.

“For­eign retailers need to be more flex­i­ble be­cause large scale is no longer a recipe for sus­tain­able growth,” Zhang says.

Tesco has been in China since 2004 and un­til re­cently had very ag­gres­sive ex­pan­sion plans. In the past cou­ple of years it said it would spend bil­lions of pounds and open about 300 stores and scores of shop­ping malls.

But those plans crum­bled as it slashed its ex­po­sure in China fol­low­ing big losses. It closed four stores last year and an­other this year. Last year its sales were about 1.4 bil­lion pounds ($2 bil­lion), a small slice of China’s 190-bil­lion-pound mod­ern gro­cery mar­ket, an ear­lier re­port by the UK’s Fi­nan­cial Times said.

Tesco is now the world’s third­largest re­tailer by rev­enue be­hind Wal­mart of the US and Car­refour of France. Ob­servers fore­cast the new ven­ture that com­bines both for­mi­da­ble scale and lo­cal ac­cess to­gether will en­able CRE to im­i­tate the mul­ti­for­mat model of Wal­mart and Car­refour.

The deal also comes as Asia’s rich­est man, Li Ka- shing, con­sid­ers sell­ing his Hong Kong su­per­mar­ket busi­ness, worth up to $ 4 bil­lion. Wal­mart plans to put in a bid, Reuters has re­ported.

The glory days when Wal­mart stores drew a rush of more than 80,000 shop­pers on the open­ing day of its first su­per­mar­ket in China in the 1990s are well and truly gone. Many other for­eign su­per­mar­ket chains have also lost money in the world’s most pop­u­lous coun­try, ter­ri­tory that once seemed to hold the prospect of rich and easy pick­ings for the top global retailers.

Un­der a ma­jor as­sault from e-com­merce firms, the profit mar­gin of the phys­i­cal re­tail mar­ket in China fell from 5 per­cent in 2005 to nearly 2.5 per­cent last year. Tesco, Car­refour and Wal­mart have all re­mained be­low that bench­mark, a Kan­tar Re­tail re­port says.

Af­ter two years of test­ing, Metro AG of Ger­many said in Jan­uary it was pulling out of the Chi­nese con­sumer-elec­tron­ics busi­ness un­der the Me­dia Markt brand. Home De­pot Inc an­nounced last year that it would shut all seven of its big-box home im­prove­ment stores in China.

Ear­lier, the South­ern Metropolis Daily re­ported last year Car­refour shut two stores and Wal­mart shut five.

Against a back­drop of de­clin­ing sales of big for­eign retailers last year, Chi­nese su­per­mar­ket op­er­a­tors have been aim­ing high and have had strong per­for­mances in re­cent years.

Yonghui Su­per­stores Co Ltd, the Fu­jian- based su­per­mar­ket chain, said ear­lier that it plans to have 350 stores and 50 bil­lion yuan ($8.1 bil­lion) in sales rev­enue in China by next year.

In its first-quar­ter re­port, net profit at­trib­ut­able to share­hold­ers surged 133.5 per­cent year-on-year to 276.14 mil­lion yuan. Op­er­at­ing rev­enue for the first three months grew 20.79 per­cent year-on-year to 7.52 bil­lion yuan.

Liu Hui, chief con­sul­tant at the Bei­jing Uni-Re­tail Busi­ness, says that the last few years have been tough for for­eign su­per­mar­ket chains be­cause of fierce com­pe­ti­tion from Chi­nese do­mes­tic ri­vals, which have gained rapidly by draw­ing on ad­van­tages in sourc­ing and dis­tri­bu­tion.

“Be­cause of soar­ing op­er­a­tional costs such as rent and per­son­nel, for­eign retailers have been los­ing money in the mar­ket,” Liu says. “On the other hand, do­mes­tic com­pa­nies have bet­ter weath­ered the down­turn. With sub­si­dies and fa­vor­able con­di­tions given by lo­cal gov­ern­ments such as bet­ter lo­ca­tions and low rent, do­mes­tic su­per­mar­ket chains such as Yonghui and Wu­mart have been able to pro­mote growth very quickly.”

Sun Art, a joint ven­ture be­tween the Ruentex Group of Tai­wan and the pri­vately held French re­tailer Group Auchan SA, now has a 13.6 per­cent mar­ket share in China, gen­er­at­ing high profit on its ex­per­tise in main­tain­ing com­pet­i­tive prices with lo­cal sup­pli­ers.

PRO­VIDED TO CHINA DAILY

Af­ter nine years in China, Tesco is on the point of scal­ing down and hand­ing its Chi­nese busi­ness to China Re­sources En­ter­prise.

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